Builder KB Home's (KBH) third-quarter profit perfectly illustrates the modest recovery taking hold in the homebuilding segment, but economists are not sure how far the recovery will go.
Paul Diggle, a property economist with Capital Economics, believes the U.S. will see approximately 750,000 housing starts this year and 850,000 in 2013. Both figures are well above the 612,000 starts recorded in 2011, but still below pre-recession levels.
"This rise in construction activity will mean that real residential investment makes a positive contribution to GDP," Diggle said. Yet, Diggle warns in his Friday report that enthusiasm for the home construction sector should be taken with a dose of caution.
For starters, he believes homebuilders are now suffering from a lack of lots to build new homes for today's buyer. Many of the remaining lots that major builders still control were bought during the housing bubble at higher prices, resulting in a situation where companies cannot sell the lots with homes priced at values comparable to estimates set when the lots were first acquired.
"Homebuilders will need to replenish land banks at today’s lower land values for the recovery in housing starts to continue," Diggle said. He believes builders will do this, but it will slow down the pace of the home construction recovery.
The National Association of Home builders (NAHB) is forecasting 900,000 starts in 2013 and recently noted that homebuilder optimism is cautious and dependent on the direction of the overall economy in 2012 and 2013.
"The builders are very optimistic about the future, but their optimism may not prove successful because of the ongoing constraint in capital access, appraisals and all of the uncertainty in the macro-economy," said David Crowe, chief economist with NAHB. "So our optimism or index reflects what builders should think should happen, but in their comments they acknowledge hurdles still exist in trying to accomplish that."
Crowe said individuals who can buy homes are taking advantage of low interest rates and attractive home prices, but mortgage access remains an issue.
At the same time, NAHB's Housing Market Index showed homebuilder confidence rising to 40 in September, which is the fifth month of increases. Any number below 50 shows builders in the pessimistic range, but September's confidence reading was the highest in six years.